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How to Use Volume in Trading?

  • Rudri Rawell
  • Dec 02 2021
  • 7 minutes
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Volume in trading is an indicator of how much a particular financial asset has been traded within a given time. While engaging in stock trading, investors can use the total number of shares traded to get an indication of their total volume. For futures and options, volume traded is determined by looking at the number of contracts that have changed hands across traders. 

Stock market traders and investors look at volume patterns across time periods to get a sense of the conviction and strength around declines and rises in specific stocks or entire markets. Options traders especially benefit from volume trading, since a stock’s trading volume indicates the option’s current interest levels. The volume of a stock is considered very important in technical analysis.

Where to find volume in trading?

All major stock exchanges keep a track of the volume of all stocks listed on the market. Thus, the volume-related data of a specific stock listed on the market is easily accessible in the market by any investor or trader. 

Some of the common ways to find the trading volume are:

  • Some of the modes include news, website, or third-party websites that update information pertaining to the stock market. 
  • Investors can also check for trading volume by reaching out to their brokers or through investment platforms.
  • Various investment platforms use candlestick charts to reflect volumes of various stocks for a given time frame. In this chart, the green color is for buying volumes and red color indicates sell volumes.
  • Many other volume charts show hourly, daily, monthly, volume charts.

What are the uses of volume trading in the share market?

Volume in trading is used as a metric for better trades. By following certain guidelines one can determine the strength or weakness of a certain shift observed in the market. The general idea is to avoid participating in market shifts that reflect weakness. Instead, it is advisable to join stronger shifts. The following pointers can help investors reach their goals when using volume trading. It is important to note, however, that these do not apply to every situation and only act as a general set of guidelines.

  1. Indicator of a trend

A rising volume often indicates the start of a rising market, in which it is recommended that buyers should continue to increase their stake and push the prices further up in the market. A scenario in which there is an increase in price but a decrease in volume suggests that there is a lack of interest. This is an indication of a possible reversal. Volume alone may not necessarily be a strong indicator. A price decrease in a large volume trade is considered a stronger indicator.

  1. Correlation of volume and price

A price against volume analysis can indicate bullish or bearish signs. For instance, if prices of a stock are falling despite high volumes, it indicates the start of a bearish sentiment. Similarly, if prices are rising with high volumes, it reflects bullish sentiments could be taking over. Although volume and prices are related, it may not mean that each of their movements is in sync with the other.

  1. Commonly used

Momentum is the rate at which stock prices change over time. It helps in identifying a trend. Rising prices are indicators of a bullish momentum, whereas falling prices reflect bearish momentum. To spot momentum, one can conduct a price to volume analysis.

Another option is by using the Moving Average Convergence Divergence (MACD). Traders mostly try to identify bullish or bearish indicators to plan their exit or entry. 

Types of volume indicators

Here are the main volume indicators that often form part of technical analysis in stock trading:

On balance volume (OBV)

OBV is a basic volume indicator. It considers volume changes for predicting stock prices. The assumption under this method is that volume and price are interlinked. The direction in which the On Balance Volume line moves tells traders about the momentum. Thus, if the OBV line is trending upwards, one can expect a bullish phase.

Chaikin money flow

This method was invented by a popular American trader. It is used to measure the dominance of buying or selling pressures in the market. As per CMF indicator, if a stock’s closing price nears its high, it means accumulation or buying pressure. When the closing price nears the stock’s low price, it reflects selling pressure.

Klinger oscillator

Considered being more complex than the OBV indicator, Klinger oscillator shows a comparison between volume and price. It converts the result of the comparison into an oscillator to predict price reversals. Investors can identify long-term money flow trends for select stocks using this indicator.

How can volume in trading benefit investors?

Here are some of the key benefits of using volume in trading for investment decisions:

  • Volume helps investors in analysing share market trends and patterns. Whether an investor wants to look at the trend in the entire stock market or specific stocks, the volume information is easy to access and can be used for trend spotting.
  • Volume is a measure of the total number of shares traded during a trading day, whether it is for buy or sell orders. Thus, if stocks are traded actively in the stock market, the volume goes up and if they are not actively traded; the volume goes down.
  • Investors can determine trading volume for many types of financial instruments, such as derivatives stocks, bonds, and commodities.
  • Trading volumes are easily accessible since these are published by the stock exchange for every trading session. 

Conclusion

Investors and traders who use volume indicators in trading should bear in mind that considering the latest share volume is crucial rather than focusing on the historical volumes. If used appropriately, volume trading can help in identifying market trends, spotting reversals, getting a precursor of bullish trends, buybacks and much more.

FAQs

What is a trading volume chart?

A trading volume chart, as the name suggests, shows the stock trading volumes. It is presented in a bar chart format with volume bars of three different colours. These bars represent the rise or fall in volumes, while the colours are indicators of whether the stock price closed higher, lower, or at the same price as the previous close.

Is low volume bullish or bearish?

Low volume is an indication of bearish trading. If the price of a security drops but on low volume, there could be other factors at play apart from a bearish signal.

Is high volume good or bad?

If a stock has a very high volume, it is an indication of some action within the company that investors may not be aware of but should know about. It indicates that some good or bad news was recently released, but not in all cases.

Does volume affect stock price?

The impact of trading volume is often neutral when it comes to stock prices. Trading volume may not directly affect stock prices, but it does have a significant impact on the way that shares are traded.

What are the 4 types of indicators?

The four commonly used indicators in technical analysis of stock trading include trend, momentum, volatility, and volume indicators.

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